How to turn banks into public servants without nationalising them

In the age of social media, the public could be the biggest stakeholder of a company in any industry. For banks specifically it is becoming painfully obvious that they have lost control of their own narrative.

Banking failures fall into three categories:

solvency,

liquidity and

conduct.

When disaster strikes, it’s actually very likely that someone could see it coming, be it the board of directors or the senior executives and supervisors within the banking industry itself, or even the public; these people are perfectly capable of detecting threats and weaknesses, and yet in crucial moments they are either not heard at all, or heard and simply ignored.

What this indicates is failures in decision making and management, and thus governance. Banks need to improve at the board level, and start taking into account a wider perspective of each situation as part of their decision making process.

Banks need to keep their finger on the public’s pulse and become data driven in order to make the right decisions. They can do this by continuously monitoring online news and customer posts on any public online medium, such as Twitter, blogs, forums, reviews sites, YouTube even Facebook and Instagram.

The public is whether we (they) like it or not, the biggest and most influential group of stakeholders, whose daily behaviour and decision making has the power to influence the wellbeing of a banking institution.

Connecting the dots

There are decisions implemented by bank supervisory boards that are actually triggered by the public, both as bank customers and as individuals whose attitudes and opinions have an impact within the wider community .

This becomes particularly obvious in situations where the financial security of individual members of the public or their community as a whole is put at risk, and is manifested through a social media outrage and/or political action - both reactions being a nightmare for banks, PR and otherwise.

In fact, it is during these times when the public at large has voiced its concerns, that politicians get involved.

This is inherently a form of governance. The invisible hand of the public, governing private and central banks.

Crises are the trigger

When a crisis impacts the general public, they become an active stakeholder with a decisive role. Policy makers taking their time to address the crisis and the public’s concerns only creates more friction, and widens the gap between the banking system and the public.

Since the global financial crisis, the EU authorities and legislators have been slower to progress than their US counterparts. This is evident in both the health of banking systems today as well as public conversations about banks in various regions. The fact that details about specific financial operations of banks are hardly visible from the outside, and in certain cases also the inside, leads the public to bank supervisors who are left to address their concerns.

Lack of Transparency

Companies in other sectors tend to do better in terms of market discipline, due to the presence of capital market funding. The same cannot be said for banks whose external financing is unsecured, and it should come as no surprise that lack of transparency does not allow for effective governance. If banks are looking to instill confidence in their stakeholders, both the public and investors, they need to become more open on every aspect of their decision-making process and let the public know who is involved, what rules exist, which methodologies and tools are used to address certain situations etc.

The public’s trust can only be gained with transparency and an intrinsic sense of fairness.

Far reaching consequences

The global financial crisis shook the entire banking system and global markets to their core, and brought an end to the concept of wealth being evenly distributed among the growing middle class. Instead, it left us with an uneven distribution of wealth and a growing lower quartile, enhanced by those who shifted from the middle to the bottom.

The way in which most countries chose to address the crisis, by mainly repricing financial assets, led to those who were already high up benefiting from the situation, as they were able to maintain their investments and savings. One may argue that many new jobs were created by new technologies, but even so, income levels are impacted by disinflation that is prevalent in most advanced economies. This also includes disinflation brought on due to the effect of lower-cost economies, for example China.

This shift is significant to banks, who can clearly see the consequences of the community’s increasing dissatisfaction in regards to the concentration of wealth, such as the effect on political systems in various countries around the world, where nationalist democracies are on the rise.

Provided that our perception of the public as a key stakeholder of the banking system and the subsequent impact of their reaction during a crisis is correct, banks should be very cautious about this uneven distribution of wealth, as it could determine a new role for banks in society in the future.

The public will remain an important stakeholder of financial institutions, with their dissatisfaction developing into ongoing regulatory action on banks.

Funnily enough, the more political pressure regulators apply on banks, the more the public’s discontent grows. The pressure comes from the counter-cyclical approach used in their supervision, which limits the banks when it should be enabling them to operate with the public’s interest in mind - addressing times of need by recycling capital in the real economy.

It’s time for banks and their regulators to make a new start on their collaboration, in order to serve the interests of all stakeholders, most importantly the public.

Our advice to banks: continuous access to social intelligence will help to keep your finger on the pulse of your most important stakeholder… the public which is turning into your new boss!

The above is based on a recent article by Peter Nathanial entitled "Banking boards facing increased pressures". Peter is former Chief Risk Officer of RBS and currently an independent advisor of International Organisations, Governments, Central Banks and Bank Boards.